Croeses Inc has drawn up a budget for 2020, which envisages a net income of $39,000 for the coming year. The rather disappointing budgeted profit was discussed at a board meeting where suggestions for improvement were made by the various departmental managers. The budget for 2020 and proposals made at the board meeting are given below. (The budget assumes operations at 75% of capacity.)

Sales

9,000 units at $32

Budget 2020

$$

Less:

Direct materials

54,000

Direct wages

72,000

Production overhead: fixed

42,000

Production overhead: variable

18,000

186,000

Gross profit

102,000

Less:

Administration, selling & distribution costs:

288,000

a.Fixed component of AS&D Costs

b.Variable component of AS&D Costs (varying with sales volume)

36,000

27,000

Required

63,000

Net profit39,000

(a)(i)Calculate the breakeven point in units and in value.

(ii)Show what profit could be expected if the company operated at full capacity.

(b)The following two proposals have been received from marketing and advertising:

(i)The marketing manager suggests reducing the selling price per unit to $28. She suggests that sales volume would therefore increase requiring 90% of the company's capacity.

(ii)The advertising manager holds that a special advertising campaign costing

$ 5,000 would boost sales volume enough to utilize 100% of production capacity. (This proposal also requires a 15% reduction in the budgeted selling price.)

A statement showing the effect of the two alternatives proposed by the marketing and advertising managers. Compare these two proposals with the original budget and advise management which of the three possible plans ought to be adopted, that is the original budget plan or (i) above or (ii) above.

(c)An independent market research study shows that by spending $15,000 on a special advertising campaign, the company could operate at full capacity and maintain the selling price at $32 per unit.

(i)Advise management whether this proposal should be adopted.

(ii)State and justify any reservations you might have.